Sun's parent agrees to sell for $8.2 billion

Hanah Cho and Nick MadiganThe Baltimore Sun

The proposed $8.2 billion sale of The Sun's parent to a Chicago real estate magnate takes the company private, positions it for long-term growth and will allow it to keep its newspaper and broadcast properties intact, Tribune Co. executives said yesterday.

But the tremendous debt needed to finance the deal - as well as slipping revenue this year - could mean cuts in newsrooms and elsewhere at Tribune's media subsidiaries, company executives, employees and analysts said.

Tribune announced yesterday that it had agreed to be sold to billionaire Sam Zell for $34 a share in a deal that involves borrowing $8.4 billion in addition to the company's existing debt. The decision came after a six-month auction in which the company received tepid offers. Tribune board members considered two competing bids over the weekend.

Zell has indicated that he plans to keep the company in one piece. Tribune executives had resisted splitting up the conglomerate because of onerous tax implications. The Chicago-based company owns 11 newspapers, including The Sun and the Los Angeles Times, as well as 23 television stations and other properties.

Tribune said, however, that it would sell the Chicago Cubs and the company's 25 percent interest in Comcast SportsNet Chicago after the 2007 baseball season. Proceeds will be used to pay down debt.

Under the transaction, Zell would invest $315 million and take control of the company in partnership with an employee stock ownership plan. The idea of owning a stake in the company is attractive but also worrisome for many employees, who have seen the value of the company decrease over time.

"As a long-term investor, I look forward to partnering with the management and employees as we build on the great heritage of Tribune Co.," Zell said in a statement.

Timothy Ryan, who took over as publisher of The Sun less than two weeks ago, said staff cutbacks would be required in the near future. In an interview in his office after a staff meeting, Ryan said he did not know how many people might have to go, but would in a month or two, after a review. He could not say whether the reductions would be made through attrition, buyouts or layoffs.

Ryan said the decision to cut staff at The Sun was prompted primarily by a decline in advertising revenue in the first three months of the year and was not the result of yesterday's sale announcement.

Tribune reported disappointing revenue in February as its publishing division continued to struggle. Advertising income decreased 5.1 percent to $233 million, while circulation revenues slid 7 percent on single-copy declines and discounts for some home delivery.

The sale of Tribune comes as the traditional media industry, including television and radio, is beset by a steady decline in audience and advertising revenue caused by the explosion of information available on the Internet and cable. The Newspaper Association of America reported that print advertising fell 1.7 percent last year, to $46.6 billion.

The Baltimore Sun Co., which has 1,550 employees, owns The Sun and several community newspapers in the region through its Patuxent Publishing Co. and Homestead Publishing Co. divisions.

The sale of Tribune would mark the most recent transformation for The Sun, which was first published May 17, 1837. As chairman of a privately held Tribune, Zell would become The Sun's fourth owner.

The motorcycle-riding Zell gained his business reputation through real estate successes, the foundation of a fortune estimated recently by Forbes magazine at $5 billion. He came to be known as "the Grave Dancer" for his penchant for spotting and pursuing opportunities that others disregarded.

In February, Zell sold his Equity Office Properties Trust to the Blackstone Group for $39 billion.

Donald C. Fry, president and chief executive officer of the Greater Baltimore Committee, said business leaders would watch closely Tribune's proposed sale and its impact on The Sun.

"I think you always, whenever there is new ownership involved, have to be concerned with whether or not there will be any changes in the composition of management or operations of the newspaper," Fry said.

Investors in various cities, including Baltimore and Los Angeles, remain interested in buying Tribune's newspapers. Craig Huber, a Lehman Brothers analyst, estimated that it would cost $517 million to buy The Baltimore Sun Co.

"Our strategy has always been to see who acquires the entire company and try to work with that person to negotiate a sale of The Sun, and that's what we still intend to do," said Theodore G. Venetoulis, a publisher and former Baltimore County executive who has been leading a local group interested in buying The Sun.

Some analysts and observers say that despite Zell's intentions to keep the company in one piece, he might be forced to consider the sale of individual properties to pay down debt.

"He has to look at [selling] because of the debt and because all the properties are not equal," said Ken Doctor, a media analyst at Outsell Inc. "Some have more value to somebody else."

Besides considering the potential sale of assets, Zell might have to consider cuts elsewhere, either in staff or in news space, Doctor said.

"You have to look at any efficiencies, and staffing is the No. 2 cost of newspapers after newsprint and ink," he said.

Steven Barlow, an analyst at Prudential Equity Group, said in a research report yesterday that Tribune would have a total debt of about $13 billion. Moody's Investors Service said yesterday that it would review Tribune's debt rating for a possible downgrade.

Tribune put itself up for sale in September under pressure from its largest shareholder, the Chandler family, former owners of the Los Angeles Times, who complained that Tribune's stock price was undervalued. Since January 2004, the stock has lost more than 30 percent of its value. Shares rose 70 cents, or 2.18 percent, to close at $32.81 yesterday.

The deal includes a $25 million break-up fee, which could encourage other bidders, notably Los Angeles billionaires Eli Broad and Ron Burkle, to make a competing offer. Analysts said that figure is relatively low compared with other break-up fees. Last week, Broad and Burkle made an 11th-hour proposal that was ultimately rejected by Tribune's special committee tasked with overseeing the auction process.

Broad declined to comment through a spokeswoman yesterday. Burkle could not be reached.

The Zell deal, which is expected to close at the end of the year, must receive shareholder and regulatory approval. Along with the company's existing debt, the deal is valued at $13 billion.

"As a private company, Tribune will have greater flexibility to transform our publishing/interactive and broadcasting businesses with an eye toward long-term growth," said Dennis J. FitzSimons, Tribune's chairman, president and chief executive officer.

Ryan, the new Sun publisher, said that in an effort to increase revenue he is "looking at opportunities in both print and online."

M. William Salganik, president of the Washington-Baltimore Newspaper Guild and a business reporter at The Sun, lamented the news of the imminent cutbacks, particularly in light of the buyouts of about 70 Sun employees across the company in late 2005.

"Of course, we don't know the magnitude of the staff reductions they're talking about, but I don't think it's a good business plan to reduce the staff to the point where it hurts the quality of the paper," he said.

Timothy A. Franklin, the editor of The Sun, said that under the company's new ownership it is crucial for the paper to retain autonomy in its news coverage.

"You don't want to see any owner, or anyone else, interfere in the independent, daily newsgathering that we do," said Franklin, who joined The Sun in 2004. "For our long-term credibility, it's vital that we remain an independent news operation that doesn't curry favors or protect sacred cows.

"Sam Zell has said publicly that his interest is economic, and it doesn't appear to be political or ideological," Franklin said. "I'm willing to take him at his word."

In the eyes of many in the industry, sales of media properties have become all too common. One was that of Knight Ridder Newspapers, whose 32 daily papers - including The Miami Herald and The Charlotte Observer - were put up for auction in late 2005 after stockholders expressed disappointment with its performance. Burkle's Yucaipa Cos. expressed interest early on, but the McClatchy Co. won the bidding in June 2006. It then put 12 of the less profitable newspapers back on the market, including The Philadelphia Inquirer and the Philadelphia Daily News.

The two Philadelphia newspapers were purchased from McClatchy for $515 million by Philadelphia Media Holdings LLC, a privately held company formed by Brian P. Tierney, a former public relations and marketing executive and Philadelphia native.

Tierney's brief experience as a newspaper publisher has not been smooth and could be a harbinger of things to come for other private investors willing to delve into the business.

Once ensconced in his new office, Tierney got into almost immediate trouble with the Newspaper Guild, which represents many of his employees, for insisting on cutting about 85 jobs from a work force of 2,600. Workers came close to a strike. There also was a precipitous decline in advertising revenue - 10 percent in September alone.

"These transitions have been painful and difficult," Tierney acknowledged, "but we just had to make some of those cuts."

But Tierney remains optimistic, not least because he faces none of the Wall Street oversight that bedevils some of his colleagues, especially at Tribune and the now-defunct Knight Ridder.

"There are real opportunities in the business, particularly with a privately held company," Tierney said. "The pressure on publicly traded companies is huge."

Tierney said he was investing $22 million in the two papers this year, including $4 million for printing plant improvements, another $4 million into Philly.com - the Web site that serves both papers - and $14 million for marketing and circulation.

"These are all things that reflect a long-term horizon, not immediate payoffs," he said.

But Mike Hoyt, executive editor of the Columbia Journalism Review, was glum about the prospects for newspapers that undergo ownership changes in the current uncertain climate, particularly given deep staff cuts recently at the Akron Beacon Journal and the Minneapolis Star-Tribune.

"The danger in this environment is that newspaper owners will 'eat their seed corn,' that is, cut back so deeply in order to maintain profitability that they destroy their chances of long-term survival, because they eventually produce a paper that has so little value that readers drop it," Hoyt said.

Tom Rosenstiel, director of the Project for Excellence in Journalism, part of the Pew Research Center in Washington, said the demands of the Internet require newspapers to maintain strong staffs.

"It may be important as a long-term strategy not to shrink the newsroom too much," Rosenstiel said. "You need to build up your digital presence, create and innovate online, and build up that business. If these are emerging enterprises, the market may need to view them more like start-ups, taking risks, spending money to build something new, rather than an old industry in decline."

Linda Foley, president of the Newspaper Guild, which represents workers at The Sun, said the staff reductions at the papers in Akron, Minneapolis and elsewhere are "part of a shake-up in the industry as a whole" and not an unavoidable harbinger of deeper cuts to come.

hanah.cho@baltsun.com nick.madigan@baltsun.com

The Baltimore Sun Co. History

Founded by Arunah Shepherdson Abell, a printer from Rhode Island, and two partners on May 17, 1837.

Its afternoon counterpart, The Evening Sun, was launched in 1910, and was identified for decades by the work of columnist H.L. Mencken. The paper closed in 1995.

In October 1986, the A.S. Abell Co. sold The Sun, The Evening Sun and WMAR-TV to the Times Mirror Company for $600 million. The newspapers became part of a chain that included the Los Angeles Times, the Hartford Courant and Newsday. Times Mirror subsequently sold WMAR to meet federal regulations barring cross-ownership of print and broadcast properties.

In June 2000, Tribune Co. acquired Times Mirror in a deal valued at $8 billion in cash, stock and debt.

Yesterday, Tribune said it is selling itself to real estate mogul Sam Zell in a deal valued at about $8.2 billion.

Company holdings

The Sun

baltimoresun.com

Patuxent Publishing Co., which publishes 17 community newspapers in the region such as the Towson Times as well as other supplements, directories and magazines.

Homestead Publishing Co., which publishes three community newspapers including The Aegis, a monthly magazine and other publications in Harford County.